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By Zhou Hongyi

The article has three sections. First, I will briefly clarify a few issues raised by some short sellers of Qihoo 360’s shares in a previous Forbes article; second, I will discuss the evolution of Qihoo 360’s current business model; third, I will share some of my observations of the difference between the Internet in China and in the U.S.

The Short Sellers Are Wrong

Qihoo 360 has been targeted by some short-sellers since last Novem

Image via CrunchBase

ber. They raised a series of false allegations based on twisted facts, and spread baseless rumors to manipulate market views on Qihoo 360.

For example, an article that appeared on Forbes.com in early April was written by one of the Forbes’ contributors who in the past had shorted Qihoo 360’s stock. Among other things, the article alleged that Qihoo 360 had only 2 salespersons to take care 300 or so advertising customers; Qihoo 360 and its advertising customers engaged in “link-exchange” to boost revenues; Qihoo 360’s web game ARPU is too high to be real, etc.

If investors pay attention to our SEC filings, they'll note that at the end of 2010, our sales and marketing department had 88 people (page 102, F-1, March 2011), and at the end of 2011, that department had 247 people (page 74, 20-F, April 2012). Although the sales & marketing department is responsible for various functions, there were more than a dozen salespersons directly interacting with link advertising customers at the end of 2011. We occasionally list a couple of sales coordinators’ names on our website and other printing materials as advertising. It is absurd to think we only have two ad salespeople based on that.

The alleged $4 million for $8 million “link exchange” revenue story was also something made up by the short sellers. Based on the information mentioned in that article, our internal auditing department under the supervision of our board audit committee has reviewed and investigated each allegation separately and exhaustively. Both investigations conclude that the alleged “link exchange” transaction does not exist.

Web game ARPU is another favorite topic for short sellers. At Qihoo 360, our web game monthly ARPU has been very consistent in the past two years, with some seasonal fluctuations. Web game ARPU is also a function of the mix of games on our platform. Qihoo 360’s web game ARPU is very much in line with other major Non-Social WEB game developers and platforms in China. Yet the short sellers tried to mislead the public by comparing our ARPU to that of MMORPG game developers or SOCIAL game platforms. Comparing our Non-Social WEB gameswith MMORPG games or SOCIAL games is like comparing apples to oranges. It is simply wrong, period.

While we firmly believe all these allegations are false, we take them very seriously. Our internal auditing team under the supervision of our board audit committee conducted extensive review and investigation into these allegations separately and found no basis for any of the assumptions made by short seller. Our timely filing of our annual report on Form 20-F with audited financial results for fiscal year 2011 with the U.S. Securities and Exchange Commission is a clear indication that we have followed proper accounting and corporate governance practices.